Home prices have risen nationwide an average of 10.9% year-over-year in March 2013. This is the greatest one-year increase since April 2006.

In California the increase is even greater. Compared to last year, home prices were:

  • 22% higher among low-tier properties;
  • 16% higher among mid-tier properties; and
  • 13% higher among high-tier properties.

Is this another unstable boom, much like the brief home price rise of 2009?

Some see signs that it may be the start of something much better — a solid and irreversible recovery in prices.

The main culprit behind the current uptick in pricing  is the low inventory of homes available on the market, according to some widely proclaimed news sources. However, as prices rise, current homeowners feel encouraged to place their homes on the market in the hopes of finally turning a profit. Thus, the purported low inventory situation in which we are currently said to be may soon be tempered, stabilizing prices before roiling out of control.

Further, as home prices rise, more homeowners are lifted out of negative equity. These now positive equity homeowners can sell their home without resorting to a short sale. Meanwhile, distressed sales have declined during the past year — another positive sign for the real estate market going forward.

All of this good news has prompted a national revival of construction, which should also (apparently) help the low inventory issue while lending support to the continuing economic recovery.

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California tiered home pricing

first tuesday insight

Much like escalating home prices, all this optimism needs to settle down before we become totally untethered from reality. So drop your anchors.

The rise in home prices experienced through March 2013 was in fact remarkable, if not stunning. But it was fueled by speculator acquisitions, which will – by their nature – not last. Once speculators as buyers exit the market, prices will drop, pulling most, if not all, those newly positive equity homeowners back underwater. This will mean no further standard additions to the multiple listing service (MLS) inventory.

And the persistent theory that inventory is the culprit is completely bogus. Inventory talk is supply side thinking that does not fly in a recovery replete with speculation. Doesn’t everyone know that no matter how many more homes you throw onto the MLS for sale (or into a trustee’s sale) they will be immediately snapped up by a hoard of speculators only to return to the market in the not so distant future?  Again, no inventory will be left to meet the unsatisfied small present demand of buyer-occupants no matter the level of new listings hitting the market.

Speculators at this point buy everything, repetitiously and in endless multiple numbers as homes come on the market. Contrast this activity with buyer-occupants as end users who buy one property through the MLS and leave the marketplace for around 16 years.

If inventory was in short supply, builders of SFRs would be all over the ground with replenishments. But they are not, and for good reason. Builders will not sell to a speculator (as that creates competition and a vacant/rented home interfering with the sale of the rest of the tract) and they properly see no demand by buyer-occupants sufficient to build more than a few niche homes.

Further, while distressed sales have been declining in California (45% fewer real estate owned (REO) resales occurred in Q1 2013 compared to one year earlier), the problem is still very elevated when viewed from a historical perspective. Short sales have merely grown to nearly replace the decline in trustee’s sales and REO sales. Think of a balancing of scales.

Due to new regulations in 2013, like California’s Homeowner’s Bill of Rights, mortgage servicers have become more cautious about rushing to that trustee’s sale. This has slowed the foreclosure process down. But it has not reduced or removed distressed sales from the picture. As of the Q1 2013, REO resales accounted for 17% of all home sales statewide. In a healthy, traditional market, this number is much lower, around 7%.

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REO resales in California

All of this merely highlights the fact that speculators cannot cure the housing market by bidding up prices, however much we may hope they will. Home sales volume supported by end users must increase first before prices can begin their stable recovery.

So far in 2013, sales volume has remained low and roughly level with the slow period in 2012.  That was before the sales volume rose through November, driving prices up in tandem with the voracious repetitive consumption of homes by speculators.

The real cure will come once end users have access to mortgage funds and the speculators have developed an urge to sell. This is controlled by:

  • jobs, which at the current pace of recovery are not set to be fully restored until 2016;
  • monetary policy of the Feds, who refuse to allow rates to go negative to jumpstart lending and the economy; and
  • austerity spending induced by congress when economic stimulus programs are needed to supplement weak growth in the private sector.

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So expect 2013 to finish as yet another dull year on the long, bumpy path to full recovery. Don’t let today’s destabilized home prices fool you — we’re not there yet by any drilldown analysis.

Re: March Home Prices See Best Annual Rise in Seven Years; Home Prices Rise, Putting Country in Buying Mood from The New York Times